The Ultimate Tax Dodgers: Internet Retailers

NEW YORK (TheStreet) -- There used to be a time when sales-tax evasion was a grimy business. It required a sleazy merchant and a greedy customer, conspiring to make the transaction in cash, "tax included" (wink-wink). Once there was a string of electronics stores on Manhattan's Lower East Side that survived by non-taxed transactions in "gray goods," in which the state tax authorities (and sometimes customers) were systematically cheated.

Today, of course, nothing has changed.

The merchants are still sleazy, the customers are still greedy -- only now, sales-tax evasion is both commonplace and organized. The name for this particular variety of organized crime is known as "Internet retailing." Thanks to a 1992 Supreme Court decision, Quill vs. North Carolina, mail-order and Internet merchants have no obligation to collect local sales taxes unless they have a physical presence in the customer's state. The result is that the entire country is now one big Lower East Side (but only rarely with acceptable pastrami).

With local governments facing layoffs and cutbacks, it appears that Congress is about to rectify this situation, in which Web retailers have a grotesque advantage over brick-and-mortar retailers. (And if you don't believe me, try finding a Tower Records outlet in New York nowadays.) Legislation requiring Web retailers to collect sales tax is getting support from both Democrats and Republicans.

One such bill is called the Main Street Fairness Act, which is detailed here. It seems increasingly likely that this bill, or something like it, is going to pass in Congress reasonably soon, and that is going to be an earthquake for both storefront and virtual retailers.

The unusually pro-revenue-collection sentiment in Congress became evident at a hearing of the House Judiciary Committeelast week, at which there was virtual unanimity, with even lip service by the Internet retailers in attendance, that hard-pressed state and municipal governments are entitled to collect the taxes that they are owed. Hell, an actual Texas Republican spoke in favor of forcing the net retailers to collect taxes.

But before we slide off into an era of good feeling and kumbaya, let's acknowledge that the campaign for and against taxing of Internet purchases has been beset by hypocrisy and doubletalk from virtually everyone involved.